Andy Brookes - Head, Market Reform Programme Office, (Roundtable chair)
Victoria Price - Legal Counsel, Reinsurance for ACE European Group
Simon Kilgour - Partner, Reynolds Porter Chamberlain
Barbara Chandler - Head of Operations, Xchanging
Kristin van Niekerk - Legal Counsel, Aspen Re
Steve Hulm - Consultant, Market Reform Programme Office
Paul Hopkin - Technical Director, AIRMIC
Martin Roberts - Manager Non-Marine, LMA
Simon Robinson - Head of UQ & I, Allianz Global Corporate & Specialty
Andy Brookes: I would like to start by considering what exactly we mean when we talk about model wordings. Do you want to start, Simon?
Simon Robinson: We view model wordings as one of the tools that we are required to give to underwriters. Ultimately that is part of the process. You can go from a fully formatted, pre-printed wording through to a blank piece of a paper. I think the debate as to whether it is model wording or bespoking is wrong as we view it as the process where you can go from something pre-printed or a model wording, where a variety of standard clauses are chosen, through to something specifically tailored for an individual client. When we talk about model wordings it includes a library of standard clauses.
Andy Brookes: Are we talking about having models for the whole contract or for particular parts of a contract that can then be put together like brickwork?
Simon Robinson: We definitely use the model wording to enhance the flexibility and to have building blocks and clauses gathered around a base with instructions to put together a tailored product for individual clients. It is not true bespoking.
Andy Brookes: Okay, what do others think about this description of model wording?
Simon Kilgour: I would differentiate between the insurance and reinsurance markets. The insurance market is more used to having model wordings; those which have an ascribed form. Take for instance, in the property market with ALS 72 (American London Sturge's 1972) the market is used to that as a standard and then variation from that can be measured. That has been common and I think in the insurance market underwriters tend to be more used to working with a recognised form from which the deviations can be measured. However, in our assessment, it is different for other parts of the market - including treaty reinsurance - where there are no model wordings as such. You do have a lot of clauses which are very similar but can be slightly different, however. It is important to measure the variation and then to ask what is important and to whom. Certain clauses may be important to lawyers but not to underwriters.
Andy Brookes: So we have a picture of "bricks" that can be put together into a whole contract but there is less familiarity with those bricks on the reinsurance side than the insurance side. Martin, is that your experience?
Martin Roberts: I concur with that last comment. There are certain clauses that have established themselves in reinsurance. We published a special termination clause - the LM^A5001 - two years ago which has established itself, according to people in the market, as a default clause and there are variants of that. However, there are no front-to-back wordings or policy forms in reinsurance.
Andy Brookes: Why is that? Has the reinsurance market just not bothered to get together to do this?
Simon Robinson: Is it not addressing the same needs but in a slightly different way? The need is to get an agreement with the client on the policy that reflects their needs best. In some ways that can be done with some standard elements and a deviation measured from that, and in reinsurance that is harder to do. Therefore I think that reinsurance contracts tend to be more bespoke.
Simon Kilgour: I think history may play a part because a lot of reinsurance business was based on strong relationships between market professionals on both the "buy" and "sell" side. There would always be a wording but it would evolve annually, and it was the broker's job to maintain and update it; to keep the 1970s car on the road.
Andy Brookes: Has this inertia been stronger in reinsurance than insurance? Does that account for why we see less use of model wordings?
Simon Kilgour: I think that the strong relationship point can excuse some shorthand, but Paul may have some different views from the buyer's perspective on insurance. In my perception it comes down to the market always being very good at dealing on price but not always at dealing on coverage. If we are buying our own domestic insurance, do we buy it on price or coverage? The market is not so good at coming up with the coverage it offers, so I think the insurance market is better at pinning down the coverage historically.
Steve Hulm: Can I add another question: what is our main driver for use of model wordings? Is it to drive efficiency within the market or is it serving a direct client need like speed of quote or speed of delivering the policy?
Simon Robinson: To reinforce Simon's point, if you have a relatively common base for your model to start with, it actually allows measurement and analysis of that deviation. It highlights if there is a need your models do not address and allows you to do something special for that particular contract. That is the bit that underwriters would rather spend their time doing, so in a sense it answers their job as well. They would rather do that than the cutting and pasting and drafting of different clauses into a wording which does not stretch the mind.
Victoria Price: From a lawyer's point of view, you can see when a policy has been put together from a building blocks basis. It does not necessarily fit together and so there are more disputes than when a model has been tailored to your needs.
Andy Brookes: Have others seen examples of the danger of bringing in a well-formed "brick" from elsewhere which then does not fit in with what you are trying to construct?
Kristin van Niekerk: Often in insurance - for instance Bermuda Forms - you deal with the entire form so it reads coherently. The other example, where you are copying and pasting, creates a great risk that you will leave something out. If you look at the contract as an entire form, the chances are that everything has been covered and a lot of analysis has gone into making those Bermuda Forms as a market standard.
Andy Brookes: Later on I will be asking you for your tips and perhaps the first one would be: "Beware of mindless cutting and pasting".
Kristin van Niekerk: However, it keeps some of us in business!
Paul Hopkin: From a purchaser's perspective, you have talked about the model wordings and the building bricks. The corporate risk manager buys the building, and to that extent the process of building up that wording is not necessarily of great importance or even visible to the ultimate purchaser of the policy. Also, many risk managers will view the wording they are first presented with as a negotiating position from the market and not a non-negotiable offer. The more complex the risk that the risk manager looks after, the more likely they are to say that it is a negotiating position. They will say that a price has been agreed and then will want to discuss coverage.
Martin Roberts: Is there more scope for negotiation the larger the premium?
Paul Hopkin: Yes. I think larger risk implies larger premium, but that shows our different perspectives.
Andy Brookes: Are you saying that the client's do not want model wording?
Paul Hopkin: Not if there is negotiation available to get better coverage. I know that is a slightly obtuse answer.
Andy Brookes: We will allow you that sidestep at this stage in the proceedings. Can we get back to Steve's point? Different amounts of model wordings are in use in sectors of the insurance market? Barbara, in your experience what have been the drivers of getting as far as we have got?
Barbara Chandler: I think we need to recognise that there are some classes of business that are standard and lend themselves to model wording. I think off the back of that, the marketplace has naturally drifted into model wordings. I think there are other classes of business - particularly where we see innovation in the London market - which need to be particularly designed for a client's business needs, and these may at some point become common use. The definition of a model wording may be a wording that is used by a number of different organisations separately for clients in the London market.
Andy Brookes: Can you give us some examples of those you class as innovation?
Barbara Chandler: On the bespoke side we have the aviation hull business, and computer crime packages, where we see innovation in the London market that starts off in a bespoke wording but can become a model wording over time. We are seeing much more standardisation of wordings on the marine excess of loss and XL.
Andy Brookes: So we have a picture of the market "finding its own level" as regards the use of model wordings in particular sectors. Steve you raised the question?
Steve Hulm: If it is cheaper and more efficient for a class of business to get wordings in that way then it will benefit the client. I think the market and the client could potentially both benefit.
Andy Brookes: Victoria, what would be your motivation to use the model wordings?
Victoria Price: I would have thought that if the whole market is using the same model wording then there is no cutting edge from the seller's point of view; no one has an edge over anyone else.
Andy Brookes: I now want us to face the issue straight on: do we have a problem or not? If we do, what is it?
Simon Kilgour: We always deal with things when they go wrong, we never see the stories that go right. Therefore I take a position that we are in a better position than we were before the contract certainty initiatives. It must make sense that at the point of contracting there is an agreed wording to which everyone can say "good", "bad" or "indifferent". Given that all the (re)insurance industry sells is a contract, the creation and understanding of that product should not be rocket science. However, contract certainty does not equal contract quality. From our perspective, people only deal with things when they go wrong. The question therefore is: are people taking false comfort in the new environment where, despite what we have said, there is no standardisation in model wordings? As Victoria mentioned, people do not all want to sell the same product because there is no differentiation. If the brokers try to get the best job for their client by dangerous bespoking - not making some of the amendments clear - that could lead to controversy. Equally, it comes back to a cultural perspective - is it price or coverage that is important to underwriters? If people are not interested in coverage, they may continue to regard coverage disputes as a transactional risk. Preventing unnecessary coverage disputes seems important to us as lawyers because we deal with these problems when they go wrong and can see that prevention is easier than cure. However, you really have to ask the practitioners of the market what sort of market they want to operate in. You need to ask if they think that eliminating unnecessary coverage disputes is a good thing.
Simon Robinson: We are very keen on eliminating coverage disputes. The whole point of having a relationship with a client is getting the product tailored to the client's express needs. You say what you need to cover and go through that negotiation process. If you are clear on your standard, even if you end up moving from it, you have a baseline from which to work and measure the deviation. It also allows us to assign capital to different areas of business and gives us clarity on what we are and are not covering. I think one of the cultural problems within the business is that we still as an industry tend to pick up a client's file once a year - around renewal time - and then leave it until the next time. I think insurers, reinsurers and brokers are guilty of that, and as the majority of business within the market is renewal business, there is a whole year in which to have that discussion while you are on risk with that client. You can ask what they really need and, given the fact their business is constantly changing, if what you have given them is actually right. I think insurers, brokers and clients have a role to play there in analysing the product more often than just at renewal time. It is a cultural thing.
Andy Brookes: Thank you. Kristin and Victoria, I am interested in your comments on this. As Simon rather nicely articulates it, "have we got the right amount of transactional risk?" I think Simon was saying that we have not and that we should be reducing the frictional cost. Have you got the right amount in your business?
Victoria Price: I was employed as a legal counsel at ACE specifically to reduce disputes going forward: "that has to be our aim". Disputes are not just a transactional risk.
Kristin van Niekerk: There is also the element that you are increasing customer satisfaction. There is more chance of the client coming back if there has not been a dispute. I think it is in everyone's interest - including the carriers - that there is no dispute or that they are few and far between. This opens up, from the legal counsel's position, the need to be more involved in the drafting of bespoke products as opposed to being stuck on "after the event" disputes.
Paul Hopkin: From the buyer's perspective, I have a couple of points on the suggestion that it would be good to keep a policy wording reviewed more often than just at or after renewal. One is the Evergreen Policy - the Evergreen Contract - which is perhaps finding increasing favour among risk managers, but the other more fundamental practice is the sequence in which things happen. If I take D&O as an example, there would be a tendency for the risk manager to agree a D&O renewal substantially on cost, but against the background of the broker saying that a wording - model or otherwise - gave him following advantages on what is being offered elsewhere. The risk manager would then make a decision based on price and the starting point of coverage but often against a background that it is negotiable. I have done this myself, and then you call in a specialist on D&O wording and have a look at the wording post-renewal - sometimes 20 or 30 days later - when the draft policy wording comes out, and then the specialist can say if he does not like a definition or if there are more definitions available - for instance the Bermuda wording - on that particular aspect of cover, and suggest that negotiation continues. Renewal is rapidly disappearing into the background.
Andy Brookes: It sounds like a rather strange world in which you negotiate after you have bought the product.
Paul Hopkin: But it is a strange world where you buy a product that is not precisely defined. Both are sides of the same coin.
Martin Roberts: I do think there has been a tendency for brokers to create bespoke clauses or tweak wordings to create a difference between their product and a competitor's. This possibly makes it harder for clients to compare like for like and just look at price, which use of a model product would help with. On the point of the use of model wordings, I think that the marine market is a good example where there are institute clauses which are recognised as common currency. That has not diminished competitiveness amongst brokers, but it depends on the add-ons to model wordings. I think that market is a good example of where the London market has managed to keep strong and use a model product as a base for a big global share.
Andy Brookes: How have they achieved that? Why has it happened in that market but not other classes of business?
Martin Roberts: I think that when a risk does call for deviation from a norm, the skills and experience in both brokering and underwriting are situated in London. That and competitive pricing go together.
Andy Brookes: Are we agreeing there are things that the industry should do more to exploit model wordings? How many agree with that? Everybody. I am still left perplexed as to why everyone thinks this is a "good thing" but is not doing it. That is a conundrum. To translate you Martin, one hypothesis is that buyers are having the wool pulled over their eyes.
Martin Roberts: I did not say that!
Simon Kilgour : You first have to look at who starts the process of creating that wording. Either there is a wording in existence, in which case you have to work with what you have got, or if there is not one in existence, it is probably the broker who takes the wording to the buyer and the buyer relies on the advice of the broker or perhaps input from a risk manager. They are the ones who are first able to identify the deviation from the norm and the tension is what the broker's job is. The broker's job is to get the best coverage for his client at the best price and that creates tension, because how do you get more coverage?
Andy Brookes: Steve, as an ex-broker, would you like to come in on this?
Steve Hulm: I think part of it - whether you are talking about model wording or whatever - is that the tag "model wording" turns people off. I would think brokers would say, "I do not want model wording, I want the best coverage for my client." If we could find a solution that offered the advantages of model wording but still gave you flexibility, I think people could buy into that. I think people are partly turned off because they immediately assume you are talking about a complete standardisation; that you have to take it off-the-shelf and that the product is being commoditised. You have to convey the message that this is not what is necessarily meant.
Simon Robinson: To what extent do people think that the market has been guilty of trying to make the products more complex than they need to be and also the pricing opaque, so you cannot say that any bit of the wording costs a certain amount? Does semi-bespoking and a little bit of tailoring to add a bit of an edge actually bring less clarity in the buying process?
Paul Hopkin: I agree with you substantially. But I would not say less clarity, rather more complexity. The upside way of saying that is that there is more flexibility in the wording. So if - with bespoke wordings, and I come back to my D&O example - a potential insurer was to say - through the broker or directly - "this definition of the insurer, or a claimer gives you that premium, but if you want bespoke wording number two or three, I will charge you additional premiums, then it is for the risk manager or insured to say that they can live with the bespoke wording definition or actually - in the D&O example - say that their board wants the Rolls Royce version, in which case they will go for the best wording, even though it costs the most money. Coming back to the building blocks, that mix and match gets to a bespoke wording situation, but one where insurers would be reluctant to deviate from one of the bespoke wordings.